How much should you spend in retirement?

I spend a lot of time talking with people who have retired early or are otherwise financially independent. From a purely anecdotal point of view, I'd say most of these folks are well-adjusted. They work to maintain balance in life, and especially with their personal finances.

That said, I've noticed that a lot of retirees — early retired or otherwise — struggle to know how much they should spend. I believe this dilemma exists for a couple of reasons:

First is the life expectancy problem. You don't know how long you're going to live. If you did know the precise date of your death (or even the year of your death), retirement planning would be much easier. You'd be able to say, “Okay, I have ten years left and $300,000 in the bank. Based on that, I should be able to spend $30,000 per year.” But you don't know when you're going to die, so a lot of retirement planning becomes guesswork.

Second is the question of what your money is for? Do you want to leave a legacy for your children (or somebody else)? Do you want to maintain a chunk of change for possible end-of-life medical issues? Or do you want to use your wealth to live life to the fullest while you can? In my case, my ideal would be to die broke. If I could spend my very last penny on the last day of my life, that'd be perfect.

The general response to these two problems is to follow what has been dubbed the four-percent rule. Generally speaking, it’s safe to withdraw 4% from your portfolio every year without risk of running out of money. (There are a lot of caveats to this guideline. To learn more, follow that link to my Money Boss article — or wait for that story to migrate to Get Rich Slowly in a few days!)

The AAII Journal — the monthly magazine from the American Association of Individual Investors — has published two articles in recent months about the problem of spending in retirement. Let's look at what they have to say.

I'm going to link to and quote from both AAII Journal articles below, but be forewarned that the AAII Journal lives behind a paywall.

People Who Spend Too Little in Retirement

During the accumulation phase of your life, you're building wealth. During this period, you work hard and invest wisely. If you're careful (and fortunate), you'll build a wealth snowball by maintaining a large gap between what you earn and what you spend. The folks who create the widest gap are likely to accumulate more wealth more quickly than those with smaller gaps.

During the consumption (or preservation) phase of your life, you shift from earning money to spending money. After you retire (and remember, the definition of retirement is no one fixed thing), your income is sharply reduced. You might not even have an income. Instead, you live off the money you accumulated during the accumulation phase of your life.

During the accumulation phase, Statman says, self-control is an important trait. Financial discipline and conscious spending allow smart savers to build large nest eggs. But here's the thing: The very same qualities that help people during the accumulation phase of life actually hinder them during the consumption phase.

Statman writes:

Excessive self-control is evident in the tendency to spend less today than our ideal level of spending, driving us to extremes beyond frugality. The prospect of spending money inflicts emotional pain on tightwads even when it might otherwise be in their interest to spend.

It's ironic, he notes, that saving is difficult for the young, but spending is difficult for the old. What good is building a stockpile of wealth if you don't actually use that money? “We need not feel guilty about spending our hard-earned savings on ourselves,” Statman writes.

But he's careful to point out that, “Some people derive no pleasure from spending on themselves.” He urge these people to consider spending on others. Give money to family members. Actively contribute to causes that are important to you. Find ways to use your money while you're still alive instead of leaving a fortune when your dead.

Grasshoppers and Ants in Retirement

The second article (from the June 2018 issue of the AAII Journal) is about grasshoppers and ants in retirement. This piece is more academic than the first, but it's also more interesting.

“Many academic studies show that retirees, particularly wealthier retirees, spend down their nest egg much slower than economic theory would predict,” the authors write.

This excessive thrift is a mystery to many economists who don’t understand why individuals would make sacrifices during their working years in order to live better in retirement if they don’t have the intention to spend down their savings in retirement. Why not go on more vacations, buy a larger house, or drive a nicer car early in life instead of setting money aside that is never spent? This tendency is especially puzzling since the average retiree doesn’t exhibit a very strong desire to leave a bequest.

On the other hand, there are indeed people who act as “grasshoppers” in retirement, spending lavishly so that their savings run the risk of depletion. Here's one way the authors describe the difference between ants and grasshoppers:

When ants receive a windfall in retirement (such as an inheritance), they spend about $5 more each year for each $1,000 they receive. When grasshoppers receive an inheritance, they spend an extra $260 per year. This means that when a grasshopper receives an inheritance, it will be completely spent within four years.

Now, based on what we all know from the fable of the grasshopper and the ants, we'd expect that ants would be the heroes in this situation, right? They're the ones who'll come out ahead in the long run. Not so fast. While the ants should feel some relief that they're not going to run out of money in retirement, the authors say they could take some lessons from grasshoppers:

Grasshoppers are behaving much more like economically rational life cycle consumers than the ants. Why did the ants save up all that money if they’re not going to spend more in retirement? This is especially puzzling if ants don’t have a strong desire to pass this wealth on to their children or to charity.

How Much Should You Spend in Retirement?

These articles are interesting from a psychological perspective, but they don't offer any practical takeaways. The real question is: How much should you spend in retirement?

Here's my advice:

Determine your current annual spending. If, like me, your spending fluctuates from year to year, calculate a three- or five-year average spend. Call this number your current annual spending.

Determine your safe spending level. You can use whatever method you'd like for this, but for simplicity's sake, I'd say use the afore-mentioned four-percent rule. Take your entire net worth and multiply this by four percent. If your net worth is $1,000,000, for instance, you'd get a result of $40,000. (If you're risk averse, either leave home equity out of the equation or multiply your net worth by three percent.) This number is your safe annual spending.

Compare the numbers. Find the difference between your current annual spending and your safe annual spending. If your current spending is greater than your safe spending, you should probably cut back. But if it your current spending is less than your safe spending, give yourself permission to spend more — if you want.

Usually when I write at Get Rich Slowly, my aim is to get people to spend less. From my experience, most people struggle with spending too much rather than spending too little. That said, I've certainly seen the opposite. In fact, sometimes the reluctance to spend borders on hoarding.

Ultimately my advice comes back to my long-time motto at this site: “Do what works for you.” Obviously, you don't need to spend more money. Nobody needs to spend more. But be aware that if you've been a prodigious accumulator of wealth, you do have the freedom to put that money to use — whether for yourself or for others.

In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.

“Take your entire net worth and multiply this by four percent. If your net worth is $1,000,000, for instance, you’d get a result of $40,000. (If you’re risk averse, either leave home equity out of the equation or multiply your net worth by three percent.)” If you are following the convention of the 4% rule being generally a safe withdraw rate then you must not include your home equity. It is fine if you want to calculate your net worth with including your home but don’t confuse your home with an investment that will generate passive returns that you can… Read more »

You’re right. You’re absolutely right. That’s been one of my biggest lessons lately as I’ve moved roughly $250,000 of my net worth from mutual funds to this house. The house is not going to generate passive returns, as you say. I didn’t use to understand that. So, while your home is part of your net worth, it’s not part of your calculation for the four-percent rule. I had to go back and edit my four-percent rule article this morning in preparation for publishing it next week precisely because of this.

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freddy smidlap

1 year ago

i just wrote something similar to this last week. we’re offspring-free in our house so the dough will go to some good friends and a few relatives if the plane goes down. i really want to write into the will that if there is anything left over then we screwed up! i see a lot of people with a zero percent w/d rate with retirement gigs and such. my feeling is that we busted out butts for a period and answered to some people we didn’t always respect so we’ll likely play it a little fast and loose. the potential… Read more »

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infmom

1 year ago

I’m an ant from a family of grasshoppers. They got on my case about not spending money when I was younger and they’re getting on my case about not spending money now. In both cases the main bone of contention is that I’m not spending money on THEM. I learned my lesson about that pretty early on. I don’t really expect to be paid back for money I lent a long time ago, but I’m not letting them off the hook for it either (which is what they expect me to do). Nope. My money, my spending. I’ve been accused… Read more »

I’d love to read an article about the nursing home issue. My mother had Alzheimer’s disease and spent the last five and a half years in care. She had a defined benefit pension but even with that, needed a big chunk of her savings to help pay for that care. For the record–because people always ask–she had very healthy habits. I struggle with how much to set aside for possible long-term care and most FI writers don’t have much to say on the subject

Most of the folks writing FI blogs are relatively young. Not all, but most. I suspect that issues like long-term care insurance and Social Security are only vague ideas to a lot of financial bloggers. There parents aren’t even really thinking about this stuff yet. (I don’t mean this as a knock on them, by the way. When I started GRS in 2006, I didn’t think about this stuff either.) But as a few of us enter our *gasp* fifties, you’re going to see these topics become more prevalent. See my own comments about dealing with Social Security for my… Read more »

My comment is similar. It’s not just a life expectancy problem, it’s a problem of end of life costs, which include medical costs that tend to increase with age as well as day to day living costs that also can take off, e.g., nursing home.

Many of us don’t want to burden others when we get to that point, and hold back on spending to ensure we’ll have enough left to cover those contingencies.

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Accidental FIRE

1 year ago

Great piece JD. I’m only semi-retired and have only been for 9 months, but I’m already sensing myself starting to fall into this mindset. Sure I make half of my former income, so there’s a psychological adjustment to be had, but I’m more hesitant for sure about spending – even if it is really the same level of spending I had just a year ago. And I’m fully FI plus room to spare, so ideally I shouldn’t be too worried.

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Jack

1 year ago

I am 76. I retired at 63. Had $600K in savings. Wife was 10 years younger and a kindergarten teacher. We BLEW through the $600K. Traveled. Bought nice new cars. Paid off house. Paid for 4 children’s college education at premium, private universities. Had a ball. Have $25K left. That is to pay for my funeral expenses. Now, we have moved to a beautiful home in Charleston, SC. Paid for. Kids are long gone and on their own. We have 7 grands. We live on the net checks ( 2 SS checks, her state teachers pension check) of $5000K month.… Read more »

You gave a lot, with paying for their education. That’s a big gift Enjoy yourselves. Picking a career that pays a decent pension takes a load off of how much savings you need to accumulate. Being able to get an income that doesn’t come from savings, I can only assume makes it easier to guesstimate how much you should spend in retirement. I won’t have a large pension, and likely won’t have large dividends from 401k/Roth, but am planning to rental properties to take the pressure off of present me, to have to anticipate and provide for all the needs… Read more »

Stay away from rental properties. I know this is the “big thing” right now on all financial blog posts but unless you KNOW what you are doing, DON’T! Too much responsibility. Right now low interest rates make it seem easy. During the Great Recession people lost EVERYTHING. This is going to happen again and again in the future. And try finding quality tenants is impossible. And unless you can do major repairs yourself it will cost a fortune to hire others and HOPE they did it right. Just spend less than you earn on a regular basis and you will… Read more »

I agree it definitely comes with its risks, and one should not go into it reluctantly. I’ve been managing my single rental property for four years now and have had much more good experiences than bad ones. I’m very lucky both in the location of the property and access to quality tenants. For Mia goes beyond simply trying to earn the maximum return, I genuinely enjoyed real estate. My current rental was a fixer-upper I lived in for sometime, and I put a lot of sweat equity into it. I may not be good at doing major repairs, but I… Read more »

Only thing you said that made sense was not to do it unless you know what you’re doing. Your returns are much higher than index funds. People lost everything because they overleveraged and were banking on appreciation that never came. I find quality tenants for all my properties so I don’t know why you say its impossible. You don’t need to do major repairs yourself – in fact I don’t do any work by myself. Sounds like you had a bad experience because you didnt know what you’re doing. I suggest you read more on the topic and try again.

Sounds lovely! I’m curious to know about survivorship arrangements — if your wife passes away first, would you continue to benefit from her pension? Are your and her SS payments roughly equal (and thus will be halved after one of you passes away and no longer collects), or is one noticeably larger than the other?

My DH collects a smallish pension and SS, but we will also rely pretty heavily on 403B-generated income (mine) once I retire.

Hers is $1500/mo. Mine $2200/mo. Her pension is $1300/mo. Note all this is after taxes and Medicare taken out. Wouldn’t get her pension. However, we ( She/I) would then sell the house and move to a CC facility. 2 older kids have large homes with a separate living area that one of us would move to if needed.

How can you only have 1100. a month expenses with utilities, taxes, etc.

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Grizzly Bear Finance

1 year ago

It’s a tough subject to tackle in just one post. Between unexpected costs, the hurdles of LTC insurance, and the impossible task of calculating just how long you’ll actually live, trying to guess right can be ridiculous. But it is what it is I suppose. Thanks for the read – gives us “young” folk something to chew over!

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Seth @ Two Corporate Millennials

1 year ago

Well done JD! As a saver it’s certainly something that I will struggle with when I’m older. Enjoyed the perspective, thanks!

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S.G.

1 year ago

I understand the math of drawing down your savings. But I picture the end of that curve as your savings whivh were one $1M or whatever down to $200k and dropping, and that curve drops faster at the end. Even if i were on my death bed that would stress me out. If you truly believe in that maybe you should do a post on annuities because I think that mentality would only work with a lifetime payment covering your basic living expenses (SS, pension, or annuity). As an aside, everyone talk about the 4% rule but I’ve only seen… Read more »

Yep. I pulled down my 4% rule post at Money Boss yesterday in preparation to port it over here in the next few days. But it quotes William Bengen explaining EXACTLY how he meant for it to work.

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Joe

1 year ago

I’m conservative when it comes to spending in retirement. I’m 44 so I could have 40+ years of spending left. It’s better to conservative at this point. If I have too much money, I can donate it or pass it along to families. The 4% rule is supposed to cover inflation, but I don’t think it really counts lifestyle inflation. There are so many more things to spend money on now than 40 years ago. That’s why you need a better cushion. Also, healthcare expense is pretty crazy in the US.

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Ris

1 year ago

My parents are semi-retired (my dad is fully retired and my mom is a tenured college professor who still teaches, but not a full courseload). My dad grew up poor and really struggles with spending money, even though they have plenty of money saved AND my mom is still earning. I wish he could enjoy it a little bit more, but I don’t know how to help him break through the irrational fear of running out of money and into the rational understanding that they are very financially secure (and insured for just about anything, including long-term care, etc).

Ris, my parents were like that. I don’t think it’s worth trying to change them, and I think having money in the bank bought them a level of comfort and security that’s hard to put a price on, and allowed them to enjoy their retirement years.

One advantage of having parents like that is that it’s easy to buy gifts for them.

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Ian Bond

1 year ago

How much should you spend begs the question of how you should spend it.

I spend much more time evaluating lower cost places to live and ways to supplement my cash flow. Lifestyle choices are fun to consider and creating online income sources is stimulating.

As you consider how much you should spend, be careful not to develop a scarcity mindset that will rob you of the joy you deserve.

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Fred

1 year ago

5 decades under my belt. I’ve generally found moderation to be best. Moderate fun, moderate sacrifice, moderate work efforts. I’ve went through a high living spend thrift phase, it ended up causing me financial hardships. I went through a miserly phase of all work and no play. I regret that phase as well because you only live once.

A retirement as an Ant isn’t enjoyable. Being a Grasshopper will be just as dangerous (if not more dangerous) as it was when you were working.

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freebird

1 year ago

Since those who “spend too little” during retirement skew towards higher net worth perhaps this issue is simply a consequence of whatever personality traits got them into their financially well-prepared position, whether it may be spending aversion, personal values, or the realization that more spending doesn’t improve life satisfaction. My own take is the upper crust get their kicks more from earning than spending, and guess what happens to people who are wired this way?

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Rebecca @ Backroads Motorsports

1 year ago

Thanks to the economic downfall, we practically started over 4 years ago with our retirement savings. My DH was 51 and me, 44. We will be retiring in about 8 years, when he is 63 and I’m 56.

I have a retirement budget and it is broken down in time periods based on our goals and income for that time period. Due to time constraints, I am focusing on the spending side for our planning and matching it to the income side. If we can’t cover the costs, then we have to work part-time or decrease our spending.

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CE

1 year ago

It could be the “Ants” are more content with what they have already and have been for quite some time. Habits are hard to change. If one is content earlier in life they may not feel any desire to spend more, even if they have more available to spend.

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Xrayvsn

1 year ago

Absolutely love the grasshopper/ant analogy (man that brings back memories). I agree that the accumulation phase is a lot easier than the consumption phase because the latter has a lot more variables. The trinity study which came out with the often quoted 4% rule showed that for the vast majority of people, they ended up with a higher net worth than they started. If I knew my exact date of death I still wouldn’t spend down to every last penny. I think I would like to leave some benefit to my survivors so that they can get a headstart in… Read more »

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